Downsizing has undercut employees’ commitment to their company’s success. Now managers will have to work overtime to restore it.

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In the early, euphoric phase of the downsizing fad, corporate managers assumed that they could have it all — investors would respond with enthusiasm to their personnel cuts, and a thinned-out workforce would deliver the high performance needed for growth and profitability. But it was not to be.

The perfect symbol of an era that is now passing is the aptly named executive-gun-for-hire “Chainsaw Al” Dunlap, CEO of the Sunbeam Corp. Last fall, weeks before announcing job cuts that would reduce the company’s workforce by more than half, Dunlap boasted to the Wall Street Journal: “When a board of directors hires someone like me, the company is already dying. It’s me or Dr. Kevorkian!”

This focus on re-engineering and downsizing has transmitted a demoralizing message to employees. It may not be the message management intended to transmit. But it is the message that has come through. The first part of the message is: “Our corporate vision promises to give us success in the new global economy. We know the only way it will become a reality is if you, our people, give us every ounce of dedication.” But the second, contradictory half of the message is: “Our No. 1 goal is to maximize shareholder value. In the pursuit of that goal, you, the employee, are expendable. We expect loyalty and top performance from you, but you must understand that we owe you nothing in return.”

For employees, this mixed message violates their sense of fairness and undercuts their commitment to the company. They begin to withdraw their loyalty and to make plans either to leave the company or, more commonly, to give less to their jobs than in the past.

What about management’s own understanding of this message? Do managers see it, as employees do, as a hypocritical, sanctimonious contradiction? Most do not. They see it as a difficult but manageable balancing act: On the one hand, they need to reduce costs by eliminating redundancies and demanding greater commitment from people; on the other, they need to keep employees reasonably well-motivated. So they use a combination of carrot (incentive pay for good performance) and stick (the threat of job loss). No contradiction there; nothing more than a passing moment of discomfort.

But after a decade of downsizing — some 1.7 million workers and managers were shown the door in 1995 alone — many executives have come to realize they have been sacrificing employee loyalty to short-term shareholder interests, straining their employees to the breaking point. They are now trying to rectify the excesses of their downsizing binge.

Even Wall Street is changing. Ernst and Young’s Center for Business Innovation conducted a recent study, titled “Measures That Matter,” of 275 investment portfolio managers, which showed that “people factors” are growing more important in shaping investment decisions. Among 39 nonfinancial criteria investors use in picking stocks, the “ability to attract and retain” talented employees ranked in the top five.

The current business climate has also changed. A 1996 Deloitte & Touche survey cites an overwhelming majority of Fortune 1000 senior executives (84 percent) who maintain that “companies make good profits in part because they treat their employees well.” A sizable majority (67 percent) claim their companies are “making more of an effort to balance the needs of their employees with those of their customers and investors” than they did five years ago.

But it will not be easy to win back employee loyalty. Employees hold what might be called a “giving/getting contract” — what I give vs. what I expect to get in return. This unwritten contract is laden with a powerful emotional charge, and if management violates it, employees will react accordingly: If they don’t get, they won’t give. Nor is what they hope to get confined to money. They are also looking for respect, opportunity, dignity, loyalty.

Increasingly, corporate success depends on marshaling an elusive phenomenon that I define by the term “discretionary effort,” the amount of effort individuals expend over and above the minimum they need to do to keep their jobs. It refers to all of the various forms of initiative, interest, motivation, creativity, responsibility, dedication, and loyalty that individuals themselves control. Some jobs require very little discretionary effort; others depend on it. Quantity of production, for instance, depends only partly on discretionary effort; computerized systems can to some degree compensate for its lack. But quality and customer service depend entirely on discretionary effort.

All of us know from daily experience how frustrating it is to deal with companies — banks, phone companies, airlines, etc. — that substitute a computer-driven system for employees, though employees who don’t give a damn and don’t know what they are doing are hardly better. In a world awash with bigness and technology, the competitive edge will go to those businesses whose employees care about customers rather than just do their jobs by going through the motions.

If management wants to mobilize its workforce, it badly needs to repair the damaged giving/getting contract.

How can this be done? I believe that management has to lean over backward to live up to its end of the contract — and then some. Two companies that are doing this successfully can serve as models. The companies are very different from one another but share one characteristic: In both cases, management has learned how to give generously and skillfully, and in return has received the full measure of the employees’ discretionary effort.

Science Applications International Corp. (SAIC), a private information systems company worth approximately $2.4 billion, is located in San Diego. It is the largest private employee-owned high-tech research and development company in the United States. Its founder, physicist J.R. Beyster, manages it in accordance with a few simple principles. One of the most important is: Find the best people and give them autonomy in tackling difficult problems. Consequently, the company is highly decentralized with 42 separate entrepreneurial divisions; each is free to respond to the needs of the market. Beyster’s attitude is: You can always buy technology; the key to business success is attention to the market and to customers. Such attention, Beyster recognizes, calls on discretionary effort. In return for giving his employees the opportunity to be creative, he gets truly remarkable performance. SAIC is extraordinarily successful.

Another instructive example is that of Harman International Industries, a diversified company based in Southern California that has grown far beyond its original product: stereo components. On March 8, 1996, President Clinton visited its plant in Northridge, California, and hailed the company as a model of how to treat employees with respect.

Dr. Sidney Harman, its chairman and CEO, has shifted from a strictly financial management style toward a more people-oriented one. “On ceremonial occasions,” Harman notes, “managers will often say to their assembled employees, ‘You are our most important asset.’ But not until recently have any but a very few managers actually begun to believe it.”

The reasons for this shift lie in the inescapable realities governing today’s corporate economy. Since technology has reduced the number of workers needed to do the work, and since global competition demands greater productivity from each employee, the goal of unlocking the individual workers’ creativity has become the No. 1 challenge facing management today. According to Harman, only the worker on the factory floor really knows how to make a product better. The old “efficiency study” industrial model believed the genius of any organization resided with the manager. Workers were often hired from the neck down.

But here’s the rub, says Harman: If boosting productivity means doing more with fewer workers, by encouraging workers to increase productivity, you are making them their own executioners. “You have to relieve your workers of this contradiction,” he insists. Harman does that at his own company by taking strong steps to ensure that increased productivity does not threaten job security. Rather than reduce its workforce by “outsourcing,” Harman International has launched a number of small, ancillary businesses — one makes clocks from the wood byproducts left over from the company’s manufacture of loudspeakers — to absorb employees who might otherwise become redundant. The company has also opened a retail outlet in Oxnard, California, to sell its products, giving employees not needed on the assembly line an opportunity to work more closely with customers — a practice that not only retains them on the payroll, but also teaches them new skills.

I first came to appreciate the subtleties of the giving/getting contract more than 20 years ago in connection with a study of Publix Super Markets Inc. in Florida. The CEO and founder of Publix, a man named George Jenkins, had an unusual gift for relating to his employees. Typically, every employee I talked with would recount anecdotes about some considerate act Jenkins had performed for them, and would then reflectively add, “He didn’t have to do that.” One Publix employee said that when he was ill, Jenkins had visited him in the hospital — twice. The first visit could be chalked up to a sense of duty, but not the second.

I found the employees’ choice of phrase, “He didn’t have to do that,” provocative and revealing. George Jenkins always took that one extra step in winning their commitment. So, today, does Sidney Harman. So does J.R. Beyster. In today’s climate of mistrust, it’s only when you go beyond the strict dictates of the giving/getting contract that you can restore employee trust and confidence.

In practice, these managers are following what one might call the “logic of the ’90s.” If the logic of the ’80s assumed the best way to improve profitability was to cut the fat to the bone through downsizing and re-engineering, the logic of the ’90s holds that a company’s core competence calls for a strategy that will lead to a superior level of customer service, achieved through a highly motivated workforce.

In my working lifetime as an employee, an entrepreneur, and a corporate director, the priorities for top management have shifted from production and engineering in the late 1940s and 1950s, to marketing in the 1960s and early 1970s, to finance as of the late 1970s. Now, in the late 1990s and looking beyond, the capacity to motivate people is becoming the highest management priority. The new model for corporate success must embody a deep understanding of the long-term implications of the giving/getting contract.

Not all companies that prosper in the global economy will follow the model set by the businesses I’ve cited, nor is it realistic to think that the majority of managers will exceed their part of the unwritten contract. But for enduring success in the global economy, there is a pressing need to at least live up to the contract.

Stephen Fenichell, author of Plastic: The Making of a Synthetic Century (New York: HarperCollins, 1996), contributed to this story.

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